Rule 86B : Restriction on use of amount available in electronic credit ledger and 1% mandatory payment in cash

The latest amendment has been made in the CGST Rules, 2017 vide notification no. 94/2020-Central Tax Dated 22-12-2020 (CGST (Fourteenth Amendment) Rules, 2020.) Amongst the various changes made vide above Notification is insertion of new Rule 86B (Restriction on use of Input Tax Credit for discharging the output liability). It may be noted that as per Notification said Rule will be effective from 1^st January 2021.

Text of newly inserted Rule 86B:

86B. Restrictions on use of amount available in electronic credit ledger.-

Notwithstanding anything contained in these rules, the registered person shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of ninety-nine per cent. of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees:

Provided that the said restriction shall not apply where –
(a) the said person or the proprietor or karta or the managing director or any of its two partners
whole-time Directors, Members of Managing Committee of Associations or Board of Trustees, as
the case may be, have paid more than one lakh rupees as income tax under the Income-tax Act,
1961(43 of 1961) in each of the last two financial years for which the time limit to file return of
income under subsection (1) of section 139 of the said Act has expired; or

(b) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (i) of first proviso of subsection (3) of section 54; or

(c) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (ii) of first proviso of subsection (3) of section 54; or

(d) the registered person has discharged his liability towards output tax through the electronic cash
ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively, upto the said month in the current financial year; or

(e) the registered person is –
(i) Government Department; or
(ii) a Public Sector Undertaking; or
(iii) a local authority;or
(iv) a statutory body:

Provided further that the Commissioner or an officer authorised by him in this behalf may remove the said restriction after such verifications and such safeguards as he may deem fit.

Highlights of new Rule 86B:

For ready reference of our readers the highlights of the new Rule is being discused as under:

a) Rule 86B has an overriding effect over other rulesThis rule starts with the non-obstante clause and has an overriding impact on any other provision of the Rules. Accordingly restriction in use of ITC will be applicable even if such ITC otherwise can be freely used as per other Rules.

b) Rule lays down restriction on use of ITC while discharging output tax liability-The new rule 86B lays down restriction on registered person that he shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of limit prescribed.

c) Output tax liability cannot be discharged in excess of 99% by utilising Input Tax credit. The main highlight of the new Rule 86B is laying down limit of 99% of output tax liability for using the ITC. This means that suppose if the output tax liability is Rs 100/- and ITC available is Rs 150/- such person can use ITC upto maximum of Rs 99/- (99%) and will have to pay tax of Rs 1 /- in cash.

d) New Rule is applicable for specified registered persons: It is important to note that new rule is not applicable across the board but is applicable on the registered person whose value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees. 

It is important to note here that the expression ‘in a month’ has been used in the Rule which means this limit of Rs 50 lakh is not be seen with respect to preceding financial year but same is to be checked for each month for which GSTR-3B is being filed.

Accordingly, in cases where turnover of taxable supply is less than 50 Lakh in a month the restriction of Rule 86B would not apply. However such checking with turnover of taxable supply needs to be carried out each month to determine as to whether the ITC restriction would apply or not and whenever this threshold is transgressed the ITC restriction for that month shall be applicable.

e) Situations where new Rule 86B shall not be applicable: Proviso to Rule 86B mandates situations where the ITC restriction shall not be applicable. These situations are discussed below:

1. Payment of Income Tax of more than Rs 1 lakh- Rule 86B would not be applicable in cases wherein the persons mentioned herein below have deposited amount of more than one lakh rupees as income tax under the Income-tax Act, 1961–

• The said registered person or
• The proprietor or karta or the managing director of the registered person or
• Any of the two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees of the registered person, as the case may be,

The above payment of income tax needs to be checked in each of the last two financial years for which the time limit to file return of income under section 139(1) of the said Act has expired.

2. Refund of ITC towards Zero Rated Supplies of Goods or services or both- Rule 86B would not be applicable in cases wherein registered person has received a refund amount of more than Rs 1 lakh in the preceding financial year on account of unutilised input tax credit under clause (i) of first proviso of section 54(3) i.e. zero rated supplies made without payment of tax. 

3. Refund of Input Tax Credit due to Inverted Duty Structure- The ITC restriction shall not be applicable in case the registered person has received a refund amount of more than Rs 1 lakh in the preceding financial year on account of unutilised input tax credit under clause (ii) of first proviso of section 54(3) i.e. Inverted duty structure.

4. Cumulative discharge of tax liability of more than 1% during the financial year- Restriction in Rule 86B is not applicable wherein cumulatively upto the said month in the current financial year registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability. Therefore, while filing return for each month, taxpayer need to check whether his cumulative discharge of tax liability of output tax through electronic cash ledger is more than 1% upto the month of filing of return.

5. Specified Registered persons-Restriction under Rule 86B is not applicable in cases wherein the registered person is

i) Government Department; or

ii) a Public Sector Undertaking; or

iii) a local authority;or

iv) a statutory body.

It appears that as these bodies will not resort to tax evasion and thus have been kept out of the new Rule.

5. Commissioner or an office authorised by him empowered to remove the restriction-The rule empowers the Commissioner or an officer authorised by him in this behalf to remove the said restriction after such verifications and such safeguards as he may deem fit.

Our Comments:

In our view the Government has by inserting the new Rule 86B tried to plug the tax evasion cases which have been detected in recent past in multiple numbers. However in our view the new Rule will definitely will be challenged and will be subject to judicial scrutiny in view of fact that it goes against the basic pillar of GST viz seamless flow of credits. Due to this Rule the tax payers will be coerced to make cash payment even if they have available ITC and further will be required to check each and every month regarding applicability of the restriction and thus will increase the compliance burden . We can say that due to some fraudsters the genuine tax payers are the sufferers.

Also Read: All about nine amendments in CGST Act applicable from 1 Jan, 2021

Read quality articles on GST authored by national level experts on the one and only exclusive GST portal CLICK HERE

***

Subscribe our portal and get FREE GST e-books , articles and updates on your e-mail.

Resolve your GST queries from national level experts on GST free of cost.

Frah Saeed

Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.